From the March low to the December high, the EUR/USD exchange rate rose by more than 14%, exceeding 1.2100. As a result, the euro has become the most expensive against the U.S. dollar since April 2018, which may be of concern to the European Central Bank, whose decision will be published today.
According to the representatives of the ECB, a strong euro may, on the one hand, suppress inflation because products imported from outside the eurozone are cheaper and, on the other hand, it may suppress economic growth because of the competitiveness of the euro zone's exports is decreasing.
The decision day. What does the market expect?
Strong euro was the concern of the ECB representatives at the turn of August and September, causing a local fall of the euro. However, in recent weeks, the depreciation of the dollar has been most visible in relation to the euro, because data on economic activity suggested that Europe is doing better than the United States. In addition to negative real interest rates in the U.S., there are growing concerns about rising debt levels, which may put pressure on the weakening of the USD.
What could the ECB do in this case? The market expects first of all that after the last local lockdown, the European Central Bank will increase the PEPP (Pandemic Emergency Purchase Programme) by 500 billion euros and extend its duration at least until the end of 2021. based on the Bloomberg consensus. The economic forecasts prepared by the ECB, including the inflation estimate for 2023, may also prove crucial. The decision of the European Central Bank will be published today at 1:45 p.m. and the press conference will start at 2:30 p.m.
US: after the stock market high, the infection peak
Meanwhile, a correction appeared in the United States after popular stock indices reached their historical highs. Dow Jones finally fell yesterday by 0.4%, S&P 500 by 0.8% and Nasdaq dived by 1.9%. It is still uncertain if and when the US Congress will agree to a relief plan for the US economy. Recently there were supposed to be doubts about the proposal of Treasury Secretary Steven Mnuchin and the 916 billion USD plan.
Moreover, the number of COVID-19 cases continues to grow in the US and the 7-day average has broken a new record. On Tuesday, 215,000 new cases were reported, which is the third-largest scale of infections in one day. Nevertheless, the Pfizer and BionTech vaccine has been approved for use, and this may give hope that the infection rate will start to decrease at the beginning of the new year.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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